Is dead-cat bounce still relevant?

Since the early 1980s, the marketing move called the dead-cat bounce has become a favorite marketing strategy for soybean farmers. There are several reasons for its popularity. It calls for selling cash soybeans, not futures. Sales are made at or shortly after harvest. This eliminates production risk, since the size of the crop is known before the sale is made. It also allows for taking the income in the year the beans are produced or the following year for tax purposes.

The analysis is simple compared to many technical systems. To chart prices for determining when to pull the trigger on sales, start tracking March futures prices and the local cash price around the middle of September. Track the cash price, because the final outcome of the strategy is to make a cash sale. Tracking futures gives a picture of the local basis.

The strategy calls for a rally of at least 10 days past the harvest low, which four out of five years comes in early October. It is more common to see the rally of 15 trading days or more. The price target is at least 35¢ above the harvest low. In recent years, with soybean prices at a higher plateau, the rally has been $1 or more per bushel.

The one weakness of the system is that there is no hard-and-fast rule to tell when to sell.

One approach is to spread out sales starting at the low end of expectations and to continue to make sales as the price rallies. In years of using the strategy, experience shows the rally usually does not last much past the New Year. Also, a weakening of the basis usually signals that a top in the cash price is not far off. And, no two years look exactly the same on the charts.

In recent years, as soybean prices have escalated to a higher level, you may have questioned whether this old reliable strategy is still valid. The answer can be found by studying the charts of the dead-cat bounce from 2001 and 2011 – 10 years apart.

In the charts shown, the first thing that really jumps out is the range in levels. Most of us have probably forgotten that cash beans were under $3.80 in 2001. The high cash price for that time period was $4.60. In 2011, the range in cash prices in eastern Nebraska was $10.50 to $13.20.

Beyond the higher level, however, the charts look amazingly similar. Both show the harvest low in October; both have a rally off that low. In 2001, it was roughly 50¢, one of the targets outlined earlier. In 2011, the rally was $1.10, slightly better than the $1 mentioned above. In 2011, a secondary rally took prices even higher after January 1. (It does not show on that chart.)

After three decades, the dead-cat bounce is still relevant, and it is a useful tool for making sales at or shortly after harvest. Farmers who use it say it works for them.